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Brazil Industry Output Drops More Than Analysts Forecast

July 2 (Bloomberg) -- Brazil’s industrial production fell in May more than economists forecast, as the government’s fight against inflation complicates its strategy to revive growth. Swap rates declined.

Industrial output dropped 2 percent in May after jumping a revised 1.9 percent in April, the national statistics agency said today in Rio de Janeiro. The decline was greater than every forecast from 29 economists surveyed by Bloomberg, whose median estimate was for a 1.1 percent drop. Production rose 1.4 percent from the year before, down from 8.4 percent in April.

President Dilma Rousseff’s administration has slashed payroll taxes for dozens of industries and cut electricity rates in a bid to boost production. At the same time, the central bank started raising interest rates in April to tame inflation that is currently above the target range. Industry confidence in June fell to its third-lowest level since 2009 following slower-than-forecast growth, and Brazil for the past month has been shaken by the biggest demonstrations in two decades.

The drop “was across the board,” said Carlos Kawall, chief economist at Banco Safra in Sao Paulo. “If we consider that the main number doesn’t capture all the market turbulence in June nor the demonstrations, it’s pretty dismal. Confidence was lost in June, there were difficulties in terms of logistics and a spike in interest rates, so it’s a pretty bad number.”

Kawall said he may revise down his 0.9 percent growth forecast for the second quarter.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell 21 basis points, or 0.21 percentage point, to 9.69 percent at 10:43 a.m. local time. The real weakened 0.6 percent to 2.2427 per U.S. dollar.

Slowing Down

Industrial production fell in 20 of the 27 sectors monitored in the month, the worst result since December 2008, Kawall said. The diffusion index, which monitors the number of index components that grew in the month, fell to 46 percent in May from 62 percent in April.

Industry contracted 0.3 percent in the first quarter from the previous three months. That drag on Brazil’s economy caused total gross domestic product to grow 0.55 percent, below the 0.9 percent median economist forecast in a Bloomberg survey. Economists surveyed by the central bank reduced their 2013 growth forecast for the seventh straight week to 2.4 percent.

Rate Increases

Brazil’s central bank accelerated the pace of interest rate increases in May in a bid to slow inflation that is hurting economic growth. The bank, which has increased its Selic rate by 75 basis points since April, will hold its next monetary policy meeting on July 9-10.

Consumer-price inflation accelerated to 6.67 percent in the year through mid-June, exceeding the top of the central bank’s target range of 4.5 percent plus or minus two percentage points.

The decline in industrial output included a 2.9 percent drop in auto production, after car manufacturers’ association Anfavea reported record output of 348,070 in May. That could be part of the reason today’s data fell below forecasts, according to Neil Shearing, chief emerging-markets economist at Capital Economics.

The Finance Ministry extended until year-end a tax cut on car sales that would have expired on April 1 as a means to boost sales. Meanwhile the government announced last week that it is rolling back the tax break for appliances and furniture.

“Much of the weakness seems to be down to the vehicle sector,” Shearing said by phone from London. “The general picture here is of underlying subdued growth. Industry is no longer contracting, but it’s not sustaining growth either. It appears to be just treading water.”

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.

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